Osborne’s employment incentives idea is no game changer

Allister Heath was Editor of City A.M. for six years up until June 2014.

Allister Heath

FOR once, the government managed to unveil a policy yesterday that had not been pre-leaked. George Osborne’s latest plan combines two ideas: it seeks to better align staff and employer incentives; and to make the labour market more flexible.

Employers will be able to make new job offers conditional on – and offer to existing staff – a new deal. Employees will be given between £2,000 and £50,000 in shares in the business, exempt from capital gains tax on disposal (whether they are also exempt from income tax on receipt isn’t clear).

In return, the employees will give up their UK rights on unfair dismissal, statutory redundancy (leaving just contractual notice periods), the right to request flexible working and time off for training, and be required to provide twice as much notice of a firm date of return from maternity leave.

Yet all of this begs several questions. If the coalition has decided that these rights are bad for jobs, because they increase the cost and risk of employing people, then why not reform them across the board?

And if employee ownership is such a good thing, then why not incentivise it more radically? Why create this strange quid pro quo, in a clumsy attempt at ticking two boxes at the same time (ownership and deregulation)?

There are lots of practical problems. The current annual tax-free capital gains tax limit is £10,600; so the value of the minimum share amount handed over would have to increase substantially for the tax incentive to mean anything.

That may not be that absurd, of course, as £2,000 worth of shares in a start-up actually represents a large stake, which in itself means that few firms may be willing to hand this out willy-nilly. If this is to be a mass-market proposal, very few employees will ever be offered more than the minimum amount.

Ultimately, it is unclear how many companies will want to take up this offer. It is hard for privately owned companies to operate with lots of small employee shareholders unless there is a prospect of a float or trade sale.

Most small firms don’t want to give up equity. They may do so to bring in star performers, but they will probably be reluctant to do so with ordinary staff. The government often says it wants to help micro-businesses by reducing the risk of taking on staff; but this won’t help somebody hiring a nanny or a cleaner.

For existing companies, there is another problem: they would obviously like to be able to fire poor performing or trouble-making staff.

But these are the last people they would like to give equity to. And what would happen to sacked staff – would they keep their shares? This could be a nightmare, especially for small firms – imagine a large number of disgruntled minority owners.

Even worse, the risk of unfair dismissal litigation could be replaced by another threat: arguments over what is a reasonable price for the shares when the employee comes to sell his or her equity.

It is extremely hard to determine share prices for privately held firms. Red tape could increase, rather than decrease.

I wish I could be more positive about this plan. But good ideas are being ruined by being introduced via an excessively complex, almost Brownite scheme born of endless compromise and riddled with problems and perverse incentives.

Osborne’s idea will help a few successful, high growth firms but it won’t be a game changer. A great shame.